Download The Circular Flow Model

• Economic Freedom
• Economic efficiency
• Economic security
• Economic equity
• Full employment
• Price stability
• Economic Growth
• Individual economic
choice
• Getting the most of
what we want from
scarce resources.
• A cushion against
economic risks.
• Distributional fairness
• Maximizing the use of
human resources
• Relatively minimal
inflation/deflation
• Increasing productive
potential
Is based on?
Freedom of Choice Freedom of Enterprise
Workers
Consumers
Producers
Savers
Investors
Etc.
Freedom of entrepreneurs
to take the risk and have
the initiative to start a
business.
Because of economic freedom,
capitalism is also called a
Make their own Economic Decisions
free enterprise system.
=
Individual ownership of the factors
of production and other possessions.
Private ownership is the opposite of:
=
government ownership of the factors
of production and other possessions.
To motivate individuals to use their factors of production, they
must receive something in return --- a reward --- or income payment.
The payment must be sufficient to motivate the property owner.
L
L
C
E
and
abor
apital
ntrepreneurship
R ent
W ages
I nterest
P rofit
Economic incentives guide resource allocation --where the resources will go in the economy (to what end
will resources be distributed?)
Economic Incentives are based on:
Individuals:
Positive Incentives
(Encourage)
vs.
Negative Incentives
(Discourage)
Consumers
Producers
Low prices
High prices
High prices
Low prices
Savers
High Interest
Low Interest
Workers
High Wages
Low Wages
Profits
Encourage new firms to
enter an industry;
therefore, more resources
go into the industry
Losses
Discourage new firms from
entering an industry; and may
cause some businesses to leave.
therefore, fewer resources
go into the industry – resources
actually move to a more
profitable industry
Definition: Economic Rivalry
Assumptions:
• Large numbers of
buyers and sellers
• No barriers to entry
or exit from the
industry
• Knowledge of
markets and prices
Benefits:
• Lower prices
• Greater
variety
• Better quality
Coordinates the decisions of buyers and sellers
Consumers want low prices!
Sellers want high prices!
Market Price
Based on Supply and Demand
in the Marketplace
Role of Government:
• legal system to protect property
• enforce contracts
Policy: “let do” -- stay out of the economy
and economic decisionmaking
Some examples of government
involvement in the U.S. economy:
• Antitrust laws to
maintain competition
• Regulation of
businesses to
protect workers
(OSHA) and
consumers (FDA,
FTC)
• Regulation of
businesses to
protect the
environment (EPA)
• Minimum wage laws
• Social Security and
Medicare
• Welfare, Medicaid and
Unemployment
Compensation
• Child labor laws
• Affirmative action
(EEOC)
• Monetary and fiscal
policies
Command System
Socialism
Market System
Capitalism
• Economic Freedom
• Private Ownership
• Public Ownership
• Economic Incentives
• Government Control
• Competition
• Individual Decision-making
• Full Employment
Minimal level guaranteed• Economic Security High-some/low-others
?????
• Economic Equity ?????
????
• Economic Efficiency
Friday, Feb. 13
• Get a stamp for your
characteristics of capitalism
paper.
• Turn in your characteristics of
capitalism paper to the front of
the room.
An Introduction to
economic flows in a pure
market economy.
The Circular Flow Model
• A simplified model of a market
economy
• It includes an analysis of:
Sectors:
• Business Firms
• Consumer Households
Markets:
• Where goods and • Where factors of
services are
production
supplied and
(land/labor/capital/
demanded
entrepreneurship)
(bought and sold)
are supplied and
demanded (bought
and sold).
–Payments for goods and services
(expenditures)
–Payments for factors of
production (income - RWIP)
–Goods and services
–Factors of Production
The Circular Flow Model
factors of production (L,L,C,E)
$ for factors of production (RWIP)
Resource Market
Consumer
Households
Business
Firms
Product Market
$ for goods and services
goods and services
GDP and National Income
National Income- The total amount of money earned by
consumer households.
GDP- The total value of all goods and services sold within
the nation in a year.
The Circular Flow Model
factors of production (L,L,C,E)
$ for factors of production (RWIP)- national income
Resource Market
Consumer
Households
Business
Firms
Product Market
$ for goods and services- GDP
goods and services
The Circular Flow Model
payments for goods and services
The Circular Flow Model
Goods and Services
Business
Firms
Factors
Of
Production
Land,
Labor,
Capital
Entrepreneurship
Consumer
Households
Factors
Of
Production
Land,
Labor,
Capital
Entrepreneurship
What sector excluded from the
simplified CF model plays a major
role in the U.S. economic system?
NEW TERM FOR
UNDERSTANDING GOVERNMENT
MONEY FLOWS (transfer payments)
And other terms:
subsidies
Tuesday, February 17
Warm-up: Copy this definition down
Transfer Payment:
• Money that is transferred from one
person to another (or group or
business). Usually government is
doing the redistribution.
• Key characteristic --- no good or
service or factor of production is
exchanged in return (purely financial
transaction)
Examples of Transfer Payments:
• Examples of transfer payments:
– Private: Aunt Suzie gives you a check for your birthday.
– Public: subsidies to businesses, social security payments,
veteran’s benefits, welfare payments, unemployment
compensation.
– Note: work may have been done in the past for which the
recipient is receiving the payment (social security,
unemployment compensation, veteran’s benefits); however,
no CURRENT PRODUCTION is taking place for receipt of the
money NOW.
Government in the CFM
Product
Market
G and S
$ for G and S
Public Works
Public Works
CH
G
BF
Taxes
Taxes
F of P
$ for F of P
Resource
Market
Can government affect the flows of economic activity?
Besides Government, what other
sectors interact in the economy?
Project:
• Draw a CFM with the
government and instead of
labeling the flow and sectors
draw a picture. (See slide
below)
• Must draw picture for CH, G
and BF.
Government in the CFM
Product
Market
CH
G
BF
Resource
Market
Can government affect the flows of economic activity?
Expanding on the CFM ($ flows)
Saving
RWIP
Taxes
Financial
Institutions
Gov
Factor Mkt.
Business
Investment
BF
CH
Gov. Expenditures
Product Mkt.
$ for imports
$ for Goods & Serv.
Foreign
Sector
$ for exports
Leakages and Injections from
Income/Expenditure Flows:
• Government
– Leakage – Taxes (T)
– Injection – Government Expenditures (G)
• Financial Institutions
– Leakage – Saving (S) (income not spent)
– Injection – Business Investment (I)
• Foreign Sector
– Leakage – Expenditures for Imports (M)
– Injection– Expenditures for Exports (X)
Aggregate (total) Expenditures = C + I + G + X-M
(AE)
= GDP = AD